Fed: Easing inflation ‘a question of when, not if,’ strategist says

Commonwealth Financial Network CIO Brad McMillan joins Yahoo Finance Live to discuss the latest Fed speak, how markets are pricing in future rate hikes, what bank earnings can tell investors about the economy, and the outlook for the tech sector.

Video Transcript

DAVE BRIGGS: Yeah, let's talk about some of those-- that Fed speak and what the markets are doing now with Brad McMillan, Commonwealth Financial Network CIO. Good to see you, sir. Let's start with some of the things out of the Fed today. Bostic GDP growth of 1%. No recession says base case. Perhaps Mary Daly moved the markets by saying, you know, inflation should be low 3% by the end of this year, which I think is pretty optimistic, but that rates will go above 5. Is that enough to move markets?

BRAD MCMILLAN: I don't think so because what we're seeing right now is, you're talking about the short-term rates, and you're talking about mortgage rates. And that's great. But I mean, really, when you look at the longer term, when you look at the 10-year, the market is saying, the economy is saying, we don't really care over time what the Fed is doing. Inflation is going down. We're discounting the next six months. So I think the market's already priced in what the Fed's doing. And I think we're just getting glitches here. We're getting little bumps. We're not getting a lot of reaction. And that, to me, says the Fed is pretty much out of the influence business at this point.

SEANA SMITH: Wow, so you don't think maybe a hawkish Fed, some hawkish commentary, then, from Fed officials over the next several months, that that could push markets lower? Because we have heard from a number of our guests over the last several days saying that markets in 2023 could retest those 2022 lows pretty soon.

BRAD MCMILLAN: That's certainly possible, but I mean, what's going to drive it? Is it the Fed? I mean, Powell has been extremely clear that he wants to keep raising. We've got other people saying the terminal rate's going to be above 5. And we still see the 10-year dropping down. Stocks are long duration assets, as you know, so longer term, inflation will go down. We're already seeing the feds start to realize that and start to indicate that. So it's a question of when, not if. And for longer term assets like stocks, it's not going to matter that much. It's really going to be about earnings, in my estimation, not about the Fed.

DAVE BRIGGS: The Fed will learn a lot this week. We'll get CPI on Thursday and Friday. The fun really begins. You mentioned ratings. All the big banks start pouring in on Friday. What do you expect we will learn about the state of the economy over those two days?

BRAD MCMILLAN: Well, when you look at the financials numbers, I mean, they basically make their money on the rest of the economy. So if they're doing well, then I think we're going to have good news ahead. And the real question here is not whether we're going to get a recession. I think that's baked in. We might get a soft landing. But the question is how bad will it be? And between the jobs numbers and between what the banks are going to say, if the news is good, we're going to say, even if we do get a recession, it's not going to be bad. And that's actually going to be really good news for the rest of the earnings universe as well. And that's what I expect to happen.

SEANA SMITH: Brad, what are your estimates when it does come to earnings? Because certainly a number of forecasters are saying that revisions need to be revised-- or earnings estimates needs to be revised lower here, even though they have been up until this point. It sounds like, though, you disagree with that.

BRAD MCMILLAN: I do disagree with that for a couple of reasons. First of all, when you look at the actual results, analysts are almost always about 5% to well on earnings, OK? And what typically happens is they will revise it down because you have CEOs and CFOs going out there and saying, oh, you know, my golf game isn't that good. My back is hurting, yada, yada, yada. But in fact, they want to talk it down.

And so the actual numbers start to come out better. And when you combine that factor, which is kind of company specific, and with the fact that I don't believe the economy is going to be nearly hit as hard as the market now thinks, I think you've got two tailwinds. And I think earnings are actually going to come in maybe not this quarter, but for this year as a whole. I think you're going to see gains. And I think they're going to be in the 5% to 10% range, maybe better.

DAVE BRIGGS: Because of that setup, what are some sectors you like ahead? And your golf game, how does it impact your projections, Brad?

BRAD MCMILLAN: My golf game is pathetic. I do my best, but that's all I can do. My investment game is a little bit better. And what I'm looking at, I'm saying the consumer, the average person is going to keep working. You're going to see-- as inflation goes down, you're going to see real wages help. So consumer staples are going to continue to do well.

I think financials are going to do well because right now, you're going to have an expanding economy. They're going to be able to take advantage of those interest rates swings. So I think those two areas. And the other thing-- and this is a slightly longer term play, but I think it will show up this year. When we look at deglobalization, we're seeing industrials actually I think is an opportunity going forward. So I think those are three areas that people aren't talking about right now. I think there are some real opportunities there.

SEANA SMITH: Brad, one sector that you didn't mention certainly getting a lot of love today, and that's the tech sector. A number of those beaten down names had fallen out of favor over the last 12 months, are seeing some buying action today. Are you seeing any opportunity there?

BRAD MCMILLAN: The tech sector to me is a play on interest rates at this point. I don't see interest rates coming back down in a serious way over time. So I think we are seeing the tech sector react to kind of the pullback in rates, but is that sustainable? I'm not so sure.

DAVE BRIGGS: So you think rates don't come down until '24, and then we get back on board tech?

BRAD MCMILLAN: Well, remember, we're not talking about short-term rates. Stocks are long duration assets. We're looking at the 10-year. Right now, the 10-year is about 3 and 1/2 thereabouts, 3.5, 3.6. And that's already pulled back about 4 and 1/4. So is that going to go back to the levels where we saw the previous valuations justified? I don't think so. I think the 10-year is going to be in this range, maybe even go up a bit. So over time, I'm a little bit cautious about tech.

SEANA SMITH: All right, Brad McMillan, Commonwealth Financial Network chief investment officer, thanks so much for joining us here.